Business magnate Salah Ezzeddine was known as a pious, generous man. Hailing from a small Shi'ite Muslim town in southern Lebanon, he was a success story among the country's poorest, historically marginalized religious sect. With his reputation for generosity (he built a stadium and a mosque for his hometown of Maaroub, sponsored pilgrimages to Mecca and published children's books), few were suspicious when Ezzeddine promised investors a share of his business with the lure of outstanding returns  from 20% to 40%  and few details of how the plan worked or guarantees or paperwork. Still, what he seemed to have  the implicit backing of Hizballah, the popular anti-Israeli militant group and political party  was as good as gold to its many loyal followers among the Shi'ites of Lebanon.

But now Ezzeddine's schemes  supposed investments in oil, publishing, metals and television, spread out from the Gulf to Africa  are unraveling on a spectacular scale, and it is casting Hizballah in an unflattering light. The house of cards began falling earlier this month, when his businesses went bankrupt, ostensibly from the effects of the global financial crisis. But rumors swirled in the press of a pyramid scheme of more than $1 billion, and the local media dubbed Ezzeddine the Lebanese Bernie Madoff. Last weekend the Lebanese government charged him with fraud. All across the Shi'ite-populated regions of Lebanon, thousands of small investors  many of whom bundled small sums of money with their neighbors to give to Ezzeddine  feel betrayed by both the man and the organization. "I inherited $100,000 from my father to continue my studies. I invested them with Ezzeddine, and now all my dreams are destroyed," says Mohammad, a 25-year-old student from Maaroub. "I don't know what I was thinking when I invested with him. We thought he was Hizballah's financier." (See pictures from inside Hizballah.)

Ezzeddine's exact connection to Hizballah is unclear. The organization denied having an official relationship with him, but Hizballah leader Hassan Nasrallah has acknowledged that the group was being tainted by association, saying he would mount an investigation to account for investor losses. But many investors have said Hizballah officials not only encouraged them to put their money and trust in Ezzeddine but also claimed that his investments were halal, acceptable according to Muslim laws that forbid profiting from interest (which they equate with usury). (See pictures of Hizballah's youth movement: the Mahdi Scouts.)

"He was able to gain people's confidence easily due to his connections with Hizballah," says Mohammad Duhaini, the mayor of Toura, another town in southern Lebanon, where he says at least 250 people invested with Ezzeddine. Says Duhaini: "Most of those who dealt with him were supporters of Hizballah [and] many people were encouraged to do business with Ezzeddine due to Hizballah's propaganda for him." Indeed, one Hizballah source told TIME that some top leaders did business with Ezzeddine. The Lebanese press has published unsubstantiated reports that his enterprise collapsed when a check he wrote to a senior Hizballah official bounced and that, as a result, the financier went into hiding until Hizballah security forces found him and turned him over to the government.

It seems surprising that the leaders of an institution as sophisticated as Hizballah would fall for a simple Ponzi scheme. But the organization relies on a network of businessmen and fundraisers such as Ezzeddine, not just in southern Lebanon but also in West Africa, South America and wherever expatriate Lebanese do business. Hizballah has been trying to become financially independent from its main patron, Iran (which has its own financial problems), and earlier this year, a Hizballah official told TIME the organization is close to becoming completely self-sustaining. What effect the Ezzeddine scandal has on those plans remains to be seen.

The worst part of the scandal for Hizballah might come not in dollars and cents but in damage to its reputation for honesty, competence and integrity, which, given its status as the world's most formidable organization of guerrilla fighters, is what makes the Shi'ite political party popular not just in Lebanon but in the wider Arab world. Those traits were on display when Hizballah engineers and social-service workers fanned out immediately in the aftermath of the war with Israel in 2006 to assess damage and offer assistance to its supporters who had lost their homes and business. Months later, Nasrallah launched a reconstruction program called Waad, or "promise," to rebuild every destroyed home by the beginning of 2010.

But since then, the organization has struggled under the burden of the massive development project. It scrapped ambitious plans to redesign the cramped urban environment of Beirut's southern suburbs, where Hizballah support is strongest and which Israel bombed most heavily. Yet Waad is still well behind schedule to meet the 2010 deadline.

For the loyal rank and file, the scandal may not tarnish their faith in Hizballah. After all, it was Hizballah, not the Lebanese government, that freed southern Lebanon from Israeli occupation in 2000, and it was Hizballah that turned back Israeli tanks in 2006. But on the back of several recent setbacks  the assassination of its operations chief last year, the electoral loss at the polls in June this year, the discovery this spring that an Israeli spy ring in Lebanon had bugged Hizballah's vehicles  Hizballah has lost some of its aura of invincibility, and its supporters no longer seem so ready to hit the front lines and the barricades.